Case study: PCIT vs. NRA Iron and Steel

AWOL – Consequences

Case outcome

A two-judge bench of Supreme Court comprising Justice Indu Malhotra and Justice U.U. Lalit in the case of PCIT vs. NRA Iron and Steel has held that providing only identity of the investors and using appropriate banking channels was not sufficient to prove the genuineness and credit worthiness of investors under section 68.

Assessing officer’s investigation

The AO conducted a detailed investigation on the investors and found:

The address provided for some companies, didn’t house
the company.

The source of funds for the investment could not be
established.

As a result, the AO added the amount invested to the income of the
assessee.

Journey of the case

The case was appealed by the assessee, and the CIT(A), ITAT and the HC
all ruled in favor of the assessee, NRA Iron and Steel.

The CIT and ITAT seem to have relied on the case of CIT vs. Divine
Leasing, Delhi HC 2008, 299 ITR 268 (Del) (The SC in CIT vs. Lovely Exports [2008]
216 CTR 195 (S.C.) dismissed an SLP against this order). In this case, the
court had observed that the assessee had discharged the primary burden u/s 68
by providing the details of the investors, and since the AO had failed to
present any reasonable evidence indicating the non-genuineness of the
creditors, the court ruled in favor of the assessee.

In the HC, the matter was dismissed on the basis that there was no substantial
question of law to decide on and the lower courts had already adjudicated on
the facts of the case.

Now the Supreme Court

The SC differed from the lower courts on the point of whether the
responsibility to prove the genuineness of the investors u/s 68 was discharged
by the assessee and since there were no arguments provided, it ruled in favour
of the Revenue and used the following to support its judgment:

264 ITR 254 (Gau) Nemi Chand Kothari (2003 Gauhati HC): This case mentions that only using proper banking channels to channel investments is not sufficient to prove that the creditor is genuine.

It also accepted the proof submitted by the AO on the investors being merely paper companies since neither the investors nor the assessee showed otherwise.

No detailed investigation was done on the creditors or at least wasn’t in the record of the case.

Only summons u/s 131 had been issued and no follow up investigation was done.

Since AO had no cogent evidence to show that their veracity could be doubted, the burden of proof would stand discharged on the part of the assessee.

NRA Steel

AO carried out a detailed investigation and found compelling evidence to doubt the genuineness of the transaction and the creditors.

No counter argument was provided and the assessee did not appear in court.

Since the burden of proof was not discharged, the SC held in favour of revenue

Moreover, from the AY 2013-14, Section 68 was amended to the effect that in case of share application money, investors must also offer a satisfactory explanation to prove the genuineness of the investment.

Missing in action

At both the High Court and Supreme Court, the assessee was not present,
and the decisions were given ex-parte.

On 26 July 2017, immediately prior to the order of ITAT, Bhushan Steel
Ltd. was admitted into a resolution program. NRA Steel used to be a group
company of Bhushan steel, change in personnel and subsequent corporate
difficulties may have contributed to NRA’s inability to defend the proceedings
before the High Court and Supreme Court.

The absence could have been a contributing factor in the outcome of the
decision.

Know your judges

Looking at the profiles of both the presiding judges in PCIT vs. NRA
Iron and Steel gives a very important insight:

None of them had ever judged a case on Section 68 or the bogus share application money issue in the past.

This was advantageous to both the parties, inasmuch as they had the opportunity to shape the narrative of the precedents in their favour. In an ex-parte case the Revenue did just that.

A quick look at all the precedents discussed in the case
using the Riverus Income Tax Research tool shows that they are overwhelmingly
pro revenue.

Our Analysis of ex-parte cases

The SC has had to decide 7 tax cases ex-parte over the years. The side with representation has won the case thrice, while the other 4 times the unrepresented party has come out on top.

However, 1971 was the last time an unrepresented party won an ex-parte tax case at the SC. It seems safe to say that not entering an appearance put NRA at a substantial disadvantage in this particular case.

What are your thoughts on this case? Leave a comment below and let us
know!

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2 thoughts on “Case study: PCIT vs. NRA Iron and Steel”

I agree that the case unrepresented could lead to erroneous result. Its the proper representation that takes the Judges through the matter, understand their standpoint and enable the party to steer them through any doubts or important areas remaining untouched and not brought to the courts notice.

Yes, the counsel does have an instrumental role in determining the course an argument takes in court. As I had mentioned in the article, the court has not discussed even a single precedent in the judgment which favoured the assessee, even though most earlier precedents did point that way.